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Job Security

01 September 2004 / Keith M Gordon
Issue: 3973 / Categories: Comment & Analysis

When is the cost of protecting an employee tax exempt?

IF AN EMPLOYER provides accommodation to an employee, there is prima facie a taxable benefit-in-kind assessable on the employee (section 102, Income Tax (Earnings and Pensions) Act 2003). There is an increased charge if the cost of providing the accommodation exceeds £75,000 (section 106).

There is, however, an exemption from the tax charges if one of the following conditions is met:

  • it is necessary for the proper performance of the employee's duties that the employee should reside in the accommodation (section 99(1)); or
  • the accommodation is provided for the better performance of the duties of the employment, and the employment is one of the kinds of employment in which it is customary for employers to provide living accommodation for employees (section 99(2)); or
  • there is a special threat to the employee's security, special security arrangements are in force and the employee resides in the accommodation as part of those arrangements (section 100).

There is also, in practice, a concessionary treatment in respect of representative occupation of the accommodation (broadly, rent-free accommodation provided to employees for the purposes of their employment). This treatment arises because the first tax charge on the provision of accommodation, introduced in 1963, exempted representative occupiers. When the legislation was overhauled in 1977 to provide the current set of rules, the Inland Revenue announced that any situation exempted under the previous rules would remain exempt even if outside the new legislative régime. Although the individual employee need not have been employed since 1977, it appears that this exemption only applies to posts that existed at 5 April 1977 (see Employment Income Manual at paragraph 11336).


This article considers in a little more detail the third of these exemptions, namely situations where there is a special security threat.


Application to directors


It is worth mentioning at this point that the other exemptions listed above, i.e. necessary for the proper performance, better performance and customary, or representative occupation, do not generally apply in respect of accommodation provided to directors (section 99(3)). There is, however, an exception for directors with no material interest (broadly, more than five per cent) in the company where either:




the director is employed full time with the company; or

the company is non-profit making or established for charitable purposes only.



With respect to the exemption in respect of security risks, directors are as eligible as their employees (provided that the relevant conditions are met).




Three conditions


Section 100 sets out three conditions, all of which must be met.


First, there must be a special threat to the security of the employee. This test is similar, but not identical, to part of that in section 377(1)(a). In the context of this latter provision (or its previous incarnation), the term 'special threat' was recently subject to close examination in the Special Commissioners' decision in Lord Hanson v Mansworth (SpC 410).


The conclusion reached by the Commissioners was that:




'threat' related to a person or thing regarded as dangerous; and

'special' meant 'exceptional in quality or degree, unusual, out of the ordinary'.



Consequently, the Commissioners viewed the meaning of special threat as:




'one which is unusual or out of the ordinary. A threat from general criminal conduct would be an ordinary kind of threat but, for example, a terrorist threat targeted at a limited group of people with a particular profile would be unusual or out of the ordinary and therefore special.'



The Inland Revenue insists that the threat must relate to the employee's well-being rather than the employer's stock or premises (Employment Income Manual at paragraph 11362). Although, unlike section 377, there is no explicit mention of the employee's personal physical security, it is submitted that the Inland Revenue is correct to interpret the legislation in this way.


The second condition is that special security arrangements must be in force. Once again, the word 'special' is used. In previous editions of the Revenue manuals, it was suggested that this condition is only met in situations where there is a genuine terrorist threat for which the appropriate police protection is provided.


It should be noted that Lord Hanson (whose case provides an interesting insight into the protection of civilians) was not considered to be at sufficient risk to warrant police protection — he only made it onto the reserve list. However, the case does indicate that Lord Hanson had good reason to be concerned about his personal physical security. Had his company's security advisers felt that he should have had round-the-clock protection (privately funded) and the provision of protected accommodation, it is certainly arguable that this would have amounted to 'special security arrangements'. Thus, it is suggested that the Revenue's previous position on this point is unnecessarily restrictive.


The current manuals indicate that all claims for security exemption should be handled by the Revenue's Solihull office.


The final condition is that the employee resides in the accommodation as part of those arrangements, which is self-explanatory.




Who meets the conditions?


Cases that would fall within the exemption conferred by section 100 will include employees (and directors) of controversial research institutes who are threatened by animal rights activists, pro-abortion medical staff who are subject to death threats, and some senior politicians.


It is also thought that other possible terrorist targets, as a result of activities in Northern Ireland perhaps or political or religious beliefs, should benefit from the exemption provided that there are special arrangements in force, including the provision of accommodation; similarly, if an individual has become the target of a fanatic. After all, section 100 does not require the security risk to be related to the individual's employment.


In addition, there have been news reports in the past few years which have referred to supermarket directors and managers and sports stars who have been subject to death threats. For as long as the threat subsists, it is

thought that these individuals would be covered by the exemption.






There is, however, one gap in the legislation. This is where the threat is not against the employee, but against a member of the employee's family. In such cases, it may well be appropriate for the employee's employer to provide the special security arrangements including the provision of safe accommodation. There is no indication, however, whether the Revenue would impose a tax charge in these circumstances.




This article is adapted from one chapter of Keith Gordon's book, Tolley's Guide to the Tax Treatment of Specialist Occupations (price £68; members and students of CIMA are currently entitled to a ten per cent discount).




Issue: 3973 / Categories: Comment & Analysis
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